Mammalian pigmentation is driven by the intercellular transfer of pigment-containing melanosomes from the tips of melanocyte dendrites to surrounding keratinocytes. Tip accumulation of melanosomes requires myosin Va, as melanosomes concentrate in the center of melanocytes from myosin Va null (dilute) mice. This distribution defect results in inefficient melanosome transfer and a dilution of coat color. Dilute mice that simultaneously lack melanoregulin, the product of the dilute suppressor locus, exhibit a near complete restoration of coat color, but surprisingly melanosomes remain concentrated in the center of their melanocytes. Here we show that dilute/dsu melanocytes, but not dilute melanocytes, readily transfer the melanosomes concentrated in their center to surrounding keratinocytes in situ. Using time lapse imaging of wild type melanocyte/keratinocyte co-cultures in which the plasma membranes of the two cells are marked with different colors, we then define an intercellular melanosome transfer pathway that involves the shedding by the melanocyte of melanosome-rich packages, which are subsequently phagocytosed by the keratinocyte. Shedding, which occurs primarily at dendritic tips, but also from more central regions, involves adhesion to the keratinocyte, thinning behind the forming package, and apparent self-abscission. Finally, we show that shedding from the cell center is six-fold more frequent in cultured dilute/dsu melanocytes than in dilute melanocytes, consistent with the in situ data. Together, these results explain how dsu restores the coat color of dilute mice without restoring intracellular melanosome distribution, indicate that melanoregulin is a negative regulator of melanosome transfer, and provide new insight into the mechanism of intercellular melanosome transfer. In mammals, pigments are made by melanocytes within a specialized organelle, the melanosome. Mature, pigment-laden melanosomes are then transferred to keratinocytes to drive the visible pigmentation of the animals hair and skin. The dilute suppressor (dsu) locus is an extragenic suppressor of the pigmentation defect exhibited by mice lacking myosin Va (i.e. dilute mice). We recently showed that melanoregulin, the product of the dsu locus, functions as a negative regulator of a shedding mechanism that drives the intercellular transfer of melanosomes from the melanocyte to the keratinocyte. Here we address melanoregulins localization within the melanocyte, as well as the molecular basis for its localization. First, we confirm and extend recently published results using exogenous, GFP-tagged melanoregulin by showing that endogenous melanoregulin also targets extensively to melanosomes. Second, using site-directed mutagenesis, metabolic labeling with H3-palmitate, and an inhibitor of palmitoylation in vivo, we show that the targeting of melanoregulin to the limiting membranes of melanosomes in melanocytes and lysosomes in CV1 cells depends critically on the palmitoylation of one or more of six closely-spaced cysteine residues located near melanoregulins N-terminus. Finally, using Fluorescence Recovery after Photobleaching (FRAP), we show that melanoregulin-GFP exhibits little if any tendency to cycle in and out of the melanosome membrane. We conclude that multiple palmitoylation serves to stably anchor melanoregulin in the melanosome membrane.